Article excerpt

Directors of financial institutions face a multitude of duties and responsibilities to shareholders, regulators, and many other "stakeholders." Just as directors are finding themselves subject to more shareholder lawsuits, they are also finding themselves subject to more litigation commenced by regulators.

The FDIC and other agencies are increasingly becoming complainants in actions against banks and directors to recover losses and penalties, or to require corrective actions based upon alleged common law fiduciary and statutory violations.

Common allegations. Typical allegations made against directors and officers include:

Of course, there is probably no more serious complaint regulators may make, both legally and practically, than failing to take needed corrective action pointed out by previous examination reports.

Judges and juries tend to have far less sympathy for directors if a clear written explanation of the problems has been delivered to the directors in previous examination reports. Perhaps equally as serious is the loss of credibility the board suffers with regulatory agencies if it does not act in a prompt and efficient manner in response to legitimate complaints arising from an examination.

Responses to enforcement. It is always important to remember there are usually only two instances in which a bank or directors must take any action in response to a regulatory request. The first is if the regulatory agency can convince the bank voluntarily to sign a consent order, judgement, or agreement. Once the instrument is signed, it will be binding.

If the bank or individual directors disagree and refuse to sign, the other action the regulatory agency may take is to initiate an administrative or judicial proceeding by filing a formal notice of charges (or complaint). The bank will then file an answer and a final hearing date will be set.

The proceedings will be heard by an independent judge and allow for a full hearing on the merits at which the bank may be represented by counsel, present its own proof, cross-examine the agency's witnesses, and generally obtain the constitutional due process rights guaranteed to U.S. citizens, including banks and their directors.

No matter which of the two previous scenarios occurs, the most important response to an adverse examination or proposed enforcement action is to immediately commence a corrective program addressing all legitimate concerns of the regulators. The vast majority of classified assets and other problems identified by regulators and examination reports turn out to be legitimate concerns. The bank's credibility and its financial condition may be severely impacted if the bank diverts an inappropriate amount of time to contesting an enforcement action rather than working on a practical corrective program.

In virtually all cases, even if the bank elects to contest the specific enforcement action (e.g., a proposed cease and desist order) the board should immediately pass a resolution adopting all parts of the proposed enforcement action relevant to the problems or criticisms. …